March 13 (Bloomberg) -- London is racing against Paris and
Zurich to become the center for yuan trading in Europe as China
seeks to take its currency global.

The Bank of England said it has the inside edge to be the
first Group of Seven nation to sign a currency-swap agreement
with the People’s Bank of China after a meeting last month. The
deal may allow the U.K. central bank to supply as much as 400
billion yuan ($64 billion) to banks, matching Hong Kong’s swap
arrangement, according to Gao Qi, a markets strategist at Royal
Bank of Scotland Group Plc in Singapore.

The center of the world’s $4 trillion-a-day market for
foreign-exchange trading is expanding ties with the second-biggest economy after yuan-denominated bond sales overseas
surged 11-fold to 174 billion yuan since 2009 and trading in the
currency more than tripled in London. China started pushing for
the greater use of the yuan outside the mainland in 2010.

“We are at the beginning of a massive journey,” Philippe
Lintern, co-head of wholesale banking for Europe at Standard
Chartered Plc, Britain’s second-largest lender by market value
after HSBC Holdings Plc, said in a phone interview from London
Feb. 19. “This is probably the most exciting thing that will
happen in my entire career. It is a revolution of financial
markets.”

‘Safety Net’

The swaps would allow the Bank of England to supply yuan to
importers and other users when there’s a shortage of the
currency. The “safety net” would have a “very strong
psychological effect” in boosting confidence in trading yuan,
Lintern said.

Since China started a pilot program allowing the use of
yuan to settle international transactions in 2009, the
proportion of its trade conducted in yuan has increased to 9
percent from less than 1 percent, according to the People’s Bank
of China. By 2015, a third of China’s cross-border trade will be
settled in yuan, making the currency one of the three most used
in global trading along with the dollar and euro, HSBC forecast
this week in a report.

Trading Capital

Britain accounts for about 46 percent of global currency
trading, according to a Bank for International Settlements study
in 2010, dwarfing the U.S. at 24 percent, France at 7 percent
and Singapore at 3 percent.

In the offshore yuan market, the U.K. made up 3 percent of
the total transactions last year, the third-largest after Hong
Kong, with a 73 percent share, and mainland China at 5.2
percent, according to a white paper published by the Society for
Worldwide Interbank Financial Telecommunication, or Swift. That
compared with 2.6 percent for Singapore, 1.9 percent for the
U.S. and 1.4 percent for France.

While China is promoting a broader use of the yuan to match
its rising status in the global economy, HSBC economists
including Qu Hongbin estimated that it will take time for the
yuan to become a dominant currency because the government
doesn’t allow it to be freely traded. The People’s Bank of China
limits the daily fluctuation of the yuan to 1 percent on either
side of a reference rate set by the bank.

Next Steps

Twelve-month non-deliverable forwards were at 6.3035 per
dollar as of 12:46 p.m. in New York, according to data compiled
by Bloomberg.

While yuan transactions surged 171 percent in January from
a year ago, the currency still accounts for less than 1 percent
of global payments, compared with about 85 percent combined for
the dollar, euro, pound and yen, according to Swift.

Central-bank Governor Zhou Xiaochuan said at a conference
in Beijing on Nov. 17 that the bank’s next step in overhauling
the foreign-exchange system will focus on convertibility.
Outgoing Premier Wen Jiabao pledged to expand cross-border use
of the yuan and encourage foreign investment.

“To become a global currency requires full
convertibility,” the HSBC economists wrote in their report.
“Although this will be done gradually, Beijing policy makers
are now more confident than ever about speeding up the
process.”

King, Zhou

China has signed currency-swap contracts totaling 2.4
trillion yuan since December 2008 with 19 countries and regions,
including Hong Kong, Australia, Turkey, Brazil and South Korea,
according to data from the People’s Bank of China website.

China is ready to discuss a bilateral currency swap with
Taiwan, Yi Gang, a deputy governor at the PBOC, said at a
briefing in Beijing today. The development of offshore yuan
centers will be based on market needs and competition, he said.

Bank of England Governor Mervyn King and his Chinese
counterpart Zhou met in Beijing last month and plan to sign a
yuan-sterling swap shortly, the U.K. central bank said in a Feb.
22 statement. The efforts show the U.K. central bank’s
commitment to the growing yuan market as other European cities
vie for the business, Paul Gooding, HSBC’s head of European RMB
business development, said in an interview from London on Feb
19. Bank of England officials declined to comment.

“Perhaps there’s a first-mover advantage,” Gerard Lyons,
the chief economic adviser to London Mayor Boris Johnson, said
in a March 8 phone interview. “It’s a case of recognizing how
the world is changing and how London needs to position itself.
The offshore Chinese currency market has the potential to be
incredibly big.”

France, Switzerland

Other financial centers are lining up to compete.

Paris has “all the conditions to become the renminbi
offshore center of the euro zone,” Banque de France Governor
Christian Noyer said in an October, according to a presentation
by Paris Europlace, a financial industry association.

No one at the Banque de France was available to comment,
Corinne Dromer, a spokeswoman, said by e-mail on Feb. 28.

It’s important for Switzerland to “advance quickly in our
efforts to establish its financial center as a Renminbi hub,”
Sindy Schiegel Werner, a Basel-based spokeswoman for the Swiss
Bankers Association, said by e-mail on March 5.

In the U.S., the Chicago-based CME Group Inc., owner of the
world’s biggest futures exchange, introduced offshore yuan
futures on Feb. 25. The U.S. Treasury regularly discusses
China’s financial sector with American companies, an official
said by e-mail on March 7, declining to be more specific.

London Campaign

As the biggest center for international-bond issuance and
currency trading, London has an advantage because of ease of
recruiting, legal framework and trading systems, Swift said in
its report last year. The time zone overlapping markets in Asia
and America is another plus, according to Swift.

The City of London Corp., which oversees the U.K.’s main
financial district, started a campaign in April to boost its
share of yuan business, enlisting lenders including Barclays
Plc, HSBC, Standard Chartered, Bank of China and China
Construction China to discuss and promote that goal.

HSBC sold yuan-denominated bonds in London that month,
becoming the first company to issue Dim Sum notes outside of
mainland China and Hong Kong.

While the swap won’t influence the exchange rate directly,
it will help to boost the confidence of companies trading the
yuan as the central bank stands by to provide liquidity in times
of stress, Adam Vos, the global head of currency forwards at
Deutsche Bank AG in London, said in a telephone interview on
Feb. 25.

Greater Confidence

“By giving people more confidence that they’ll be able to
settle trades, it encourages more participants to the market,”
Vos said.

Foreign-exchange swaps in deliverable yuan surged by 240
percent to an average $3.1 billion a day in London in the first
half of 2012 from the same period of 2011, the City of London
Corp. wrote in an e-mailed statement on Jan. 31.

Citigroup Inc. said Feb. 27 that it added yuan to its so-called pooling service in London, a tool to manage cash flow and
foreign-exchange costs by notionally offsetting cash balances
without performing currency trades, in response to the “growing
internationalization” of the yuan.

“London has a natural fit,” Vos said. “Foreign exchange
happens in London -- liquidity has a gravitational pull, and
right now, London has that liquidity.”